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Morpheus TradingMajor Market and ETF Trading |
A Few ETFs With Bearish Divergence
The major indices wrapped up a positive week with a quiet session of trading last Friday. Taking a healthy rest from two straight days of solid gains, stocks oscillated in a tight, sideways range throughout the entire session. The broad-based S&P 500 was unchanged, but the Nasdaq Composite, held down by negative earnings reports from Google and Microsoft, fell 1.3%. Conversely, the Dow Jones Industrial Average gained another 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.5% and 0.2% respectively. The S&P 500 and Dow Industrials both finished near their intraday highs, while the Nasdaq Composite closed at the middle of the day's range.
As we often see on the first rest day following a sharp rally, turnover receded across the board. Total volume in the NYSE declined 15%, as volume in the Nasdaq eased 11% below the previous day's level. Considering that the Nasdaq lost more than one percent, it's healthy that the decline occurred on lower volume. Market internals were not too bad either. In the NYSE, advancing volume fractionally exceeded declining volume. The Nasdaq adv/dec volume ratio was negative by a ratio of less than 3 to 2.
Institutional sector rotation has become very apparent over the past several weeks. Coming into July, energy, steel, and agriculture/fertilizer were clearly the strongest sectors in which to be positioned, but that has clearly changed. ETFs in those industries are now showing the weakest daily chart patterns, while biotech has risen to the top. Institutions such as mutual funds have bylaws that limit the percentage of cash exposure they're allowed to carry in their portfolios. As such, their money must always be at work, somewhere in the market. As sector traders, our job is simply to determine where that institutional money is flowing, then ride along the coattails of the "smart money." That's why we bought the Biotech HOLDR (BBH) at the beginning of the month, when institutional money flow into sector became too strong to ignore.
With the exception of the numerous biotech ETFs, which are consolidating at or near their highs, most sector ETFs are merely bouncing off their lows from the protracted downtrends they've been stuck in. Those ETFs may offer opportunities for ultra short-term momentum traders, but there is too much overhead supply to hold them long for more than a few days without quickly selling into strength for a quick profit (as we recently did with Ultra Russell 2000 ProShares [UWM]). With the exception of biotech, and perhaps gold/silver, there are frankly very few low-risk opportunities on the long side of the market right now (unless you're an ultra short-term trader). Even though the major indices have bounced several percent over the past few days, don't feel as though you're missing much if you didn't jump back on the buy side of the market. Most of the stock market's gains were the result of a massive bounce in the financial sector, which has been beaten blind, but we were simply not interested in playing the dangerous game of "bottom fishing."
Although the the market is presenting few bullish setups, sector ETFs with newfound relative weakness (as mentioned above) may present select short selling opportunities on a bounce. One such ETF is the Market Vectors Steel (SLX), which fell below its 200-day MA as the overall market rallied last week:
Rather than selling short SLX at current levels, it's a better play to wait for a bounce into resistance. Specifically, a rally that probes above the 200-day MA would present a decent short opportunity. Along with the 200-day MA now acting as new resistance, the prior lows from early July also converge in that same area.
The seemingly unstoppable agriculture/fertilizer sector may also have formed a significant top. After consolidating in a tight range, at its recent lows, for the past two weeks, Market Vectors Agribusiness (MOO) broke down below its 200-day MA last Friday. As its chart pattern is now similar to that of SLX, MOO can be sold short on any decent bounce into resistance of its prior base of consolidation and 200-day MA:
In the pre-market, Swiss pharmaceutical giant Roche Holdings announced an offer to acquire all outstanding shares of Biotech company Genentech (DNA), at a significant premium over current market price. As of last Friday's close, DNA held a 40% weighting of the Biotech HOLDR (BBH). As such, we expect BBH to open much higher today. We'll probably sell BBH into strength of the opening gap, as we don't like to remain in stocks or ETFs that are driven by news, especially takeover candidates that can get jerked around by rumors. Still, we're probably looking at a gain of nearly 10% since our original entry on July 2. Especially in this market, we're certainly not going to complain!
Open ETF positions:Long - BBH, GLD, RSX
Short - (none)
NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. Wagner is currently working on this third book, scheduled for publication in early 2008.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
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